Oil slide threatens Africa's economic growth

PatrickMcGroarty

Plunging oil prices are threatening Africa's economic ascent.

Recent oil and gas discoveries were hailed as a godsend for African nations aspiring to middle-income status. But billions of investment dollars are moving into projects just as crude prices have tumbled, raising fears that some may be put on hold.

Total SA, Exxon Mobil Corp. and other companies are at work on a $16-billion oil project in Angola that will be profitable only if oil prices average more than $70 a barrel, Citigroup analysts estimate. The price of Brent crude closed at a new five-year low on Thursday, falling nearly 1%, or 56 cents, to $63.68 a barrel.

Anadarko Petroleum Corp. and Eni SpA have spent more than $5 billion developing natural-gas fields in Mozambique that threaten to become much less profitable if global supply expands too rapidly. Ugandan officials say they fear lower oil prices could deter companies, including Tullow Oil PLC and China's Cnooc Ltd., from following through on plans to invest up to $15 billion to develop the country's oil fields.

Cheaper fuel will help many African countries suppress inflation by keeping energy import costs down. But the continent's biggest economies have staked their futures on robust prices for oil and gas. Pumping high-price crude has generated rapid economic growth and spending that spilled across borders.

Now, those flows are set to slow sharply. Capital Economics says falling commodity prices will cut growth across sub-Saharan Africa by one percentage point next year, to around 4%, the slowest rate since the late 1990s.

"It's bad for all of Africa," said Jack Allen, an economist at the research firm.

Nigeria is a case in point. Africa's top economy and crude producer has grown 7% a year for the past decade. As retail and telecommunications companies have taken off, the oil industry has shrunk to a more balanced 14% of economic activity.

But Nigeria's government revenue hasn't evolved with its economy. Oil still fuels more than 70% of the budget, leaving public institutions dependent on the ebb and flow of global energy prices. As Brent crude prices fell below $70 a barrel this month, Nigeria's naira currency plummeted to record lows.

Nigeria's Finance Minister Ngozi Okonjo-Iweala says the drop in oil prices could drag economic growth down by a percentage point to 5.3% in 2015.

Earlier this month, the central bank raised interest rates to draw back investors as the currency fell. The higher rates will now make it more expensive for the government to borrow.

Now Ms. Okonjo-Iweala is scrounging for new revenue to hold elections in February and fight the Islamist insurgency Boko Haram. She plans to raise taxes on yachts, private planes and sparkling wine. She has said she may even impose a mansion tax--small steps toward filling a big hole.

"Undoubtedly, it's going to be tough times," she said in an interview.

Cheaper oil is also complicating nearby Ghana's efforts to dig out from deep trade and budget deficits. Ghana's cedi currency was tumbling even before oil prices started dropping. In August, the country requested a bailout from the International Monetary Fund that could be worth around $500 million.

To meet the IMF's terms, Ghana is taxing oil at the pump, which Ghanaians won't notice, since the tax is being rolled in as prices fall. But the long-term picture is murkier. Ghana is set to nearly double oil production from around 100,000 barrels a day to 190,000 by 2016--output the government hoped would finance road, power and port expansions to help the economy grow. Now it isn't clear where that revenue will come from.

"We are woefully short," said Sydney Casely-Hayford, a financial consultant and former adviser to Ghana's treasury.

Countries along Africa's Indian Ocean coast fear oil and natural-gas projects that have drawn more than $25 billion to the region over the past five years could look less attractive as energy prices fall.

Officials in Mozambique are speeding up legislation backing natural-gas projects by Texas-based Anadarko Petroleum and Italy's Eni. The Anadarko project alone could add more than $30 billion to the country's gross domestic product by 2035, according to Johannesburg-based Standard Bank Ltd.

"The recent fall in oil prices seems to be increasing the sense of urgency to close the deal," said Paul Eardley-Taylor, Standard Bank's head of oil and gas for southern Africa.

The head of Anadarko's business in Mozambique didn't respond to requests for comment, and an Eni spokesman declined to comment. Exxon Mobil referred questions about the Angolan project to Total, its partner in the development, which also declined to comment.

A Tullow Oil spokesman in London said the company has no plans to change its investment plans in Uganda or elsewhere in Africa. "We believe that such fluctuations in the oil price do not fundamentally change the value of these projects," said spokesman George Cazenove.

East African neighbors Kenya and Tanzania have signed exploration and extraction deals with Tullow as well as Statoil ASA, Exxon Mobil and others on the heels of substantial discoveries. But until those projects start pumping fuel, both countries remain net energy importers.

That's not a bad spot to be in as oil prices are sinking. Many governments spend billions of dollars a year subsidizing fuel prices for their citizens. High oil prices can push up inflation and the portion of meager incomes that many Africans devote to the fuel they depend on for transport and cooking.

Citing the global oil-price slump, Tanzania cut the price of gasoline, diesel and kerosene last week by about 7%.

But for countries banking on large oil projects, such benefits will be wiped out if prospective investors pause or retreat from exploration and production plans. "With decreasing oil prices, companies will now have to examine the opportunity costs even more so with respect to new frontier markets," says Ahmed Salim, a Dubai-based senior associate at Teneo Intelligence consultancy.

Falling prices for oil and other commodities are hurting African economies in other ways, too.

South Africa's central bank said Monday that falling fuel prices cut the country's import bill in the third quarter. But slack demand from China and Europe is pushing down the price of many minerals and crops, in addition to oil. That dragged down South Africa's gold and iron exports from the previous quarter.

As a result, South Africa's current-account deficit was wider than expected, sending South Africa's currency to a six-year low as investors retreated from the slowing economy.

Persistent weakness in the rand undermines any lift from cheap oil, said Nico Bezuidenhout, acting chief executive of South African Airways.

"You've got the break on the fuel price," he said. "But the currency has gone to the dogs."

Nicholas Bariyo in Kampala, Uganda, and Inti Landauro in Paris contributed to this article.

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